Law Practice Management Asked and Answered Blog

Category: Should

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Apr 17, 2019

Law Firm Merger/Acquisition – Should We Merge or Acquire

Question: 

I am the managing partner of an eight attorney firm in Dayton Ohio. We have two equity partners (both in our early fifties), two non-equity partners, and four associates. Our practice is a very niche specific practice and there are only three or four other practices in the state that do the work that we do. There is another firm in Cleveland, Ohio that has approached us regarding possible merger or acquisition. The firm does similar work that our firm does but this firm also handles some areas that we don’t handle but would like to get into that falls within our niche area. There are two founding partners in the firm – one in his late sixties and the other in her early seventies, one associate attorney, and four staff members. The two partners are planning on moving towards retirement and are looking for a succession strategy. They have not shared with us their timeline or any financial information. We have had one face-to-face meeting and several phone calls. We would appreciate your take on this, next steps, and whether we should pursue further.

Response: 

You have not indicated whether your firm has a strategic plan? If you do my next question is whether this practice area and having another office three and one half hours away supports the vision of your firm?  Often, but not always, a merger will emerge as a way to achieve some aspect of the firm’s vision. For example, a merger might help the firm:

The above would be right reasons to consider a merger or acquisition.

You should take pause if the reasons you are considering merging or acquiring the other firm include:

If your firm does not have a strategic plan you may want to at least engage in some form of internal self-analysis to insure that you are looking through a clear lens, are building a sound business case for the merger or acquisition, and are identifying the characteristics of the ideal merger/acquisition candidate.

In your situation you are looking at actually acquiring a practice three and a half hours away with two senior partners that will be retiring. Obviously, there are risks but the devil will be in the details that will come out of a thorough due diligence examination which I believe is your next step. Here is a link to a prior post concerning information that you should ask the other firm to provide. 

Your due diligence examination should focus on:

Right up front you should ask the partners in the other firm their specific timeline for retirement and how long they will be available for client and management transition. A key issue will be whether clients will remain with the firm when they retire? Are there others in the firm, non-equity partners or associates, that the clients have confidence in to the extent they would remain with the firm or will this all be on your shoulders as owners of the acquired firm? The other question you should should ask up front is what the partners of the other firm are looking for in the form of purchase price or compensation for the firm.

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John W. Olmstead, MBA, Ph.D, CMC

 

Nov 08, 2017

Law Firm Retreats – Should Spouses be Invited?

Question: 

Our firm is a twenty-five attorney firm located in Austin, Texas. I am the firm administrator with the firm. We are planning on having a firm retreat consisting of the attorneys in the firm in February and are wondering whether we should included the spouses. Some of our partners think we should include spouses and others think that we should not. We had had retreats in the past and have not included spouses. I would appreciate your thoughts.

Response: 

Having spouses attend law firm retreats varies from firm to firm. The majority of the retreats that I have facilitated have not had spouses attend. The decision to have wives or husbands of attorneys attend the retreat depends on the retreat program and the retreat goals. Firms do not generally invite spouses when the retreat is devoted primarily to firm business and little time is available for recreation and informal socializing.

If social programs are planned, some firms do invite spouses and design special programs (e.g. sightseeing tours, tennis/golf games, lunches, special sessions) for them, with couples getting joining each other in the evening for dinner and evening programs.

Some firms will setup special sessions during the weekend to orient spouses to the firm’s organization, operation, and culture. In these special sessions, spouses are introduced to the firm’s history, culture, pecking order among the lawyer ranks, why attorneys work after hours and on weekends, and how career advancement works.

When wives or husbands occupy positions in the firm, special day-to-day programs are often created that deal with any problems that the firm may be experiencing as a result of their employment. Problems such as spousal conflict, differences in compensation, and work production are just a few examples of issues that can occur when spouses are employed in a law firm. Special pre-retreat consideration needs to be given to how the presence of family staff members would influence the retreat proceedings.

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John W. Olmstead, MBA, Ph.D, CMC

Oct 11, 2017

Law Firm Capitalization – Should There Be a Buy-In?

Question: 

I am a partner in a firm in Los Angeles. We have nine attorneys – four partners and five associates. We are a young firm in that we have only been in business for four years. The four partners started the firm together, we are equal partners, and we split the profits equally. When we started the firm we each made equal capital contributions. We do not have a partnership agreement. We are thinking about bringing in two associates as equity partners and are trying to think through the mechanics and one of our questions is whether there should be a buy-in and if so how should we determine it. We would appreciate your thoughts.

Response:

Law firms have different viewpoints on this subject. I have worked with some larger firms that are in second generation or later that do not require a capital contribution at all. They use end of the year distribution hold backs and credit lines to fund their working capital requirements. Other firms do require capital contributions upon being admitted as a partner and additional contributions over time when additional capital is needed or when partners acquire additional capital interests.

Smaller firms tend to require new partners/shareholders to pay for their interest in the firm. The buy-in can provide additional capital for the firm or can be used to compensate the existing partners/shareholders for their investment and sweat equity in creating the law firm or in growing it to its present size. One approach that some firms use it to include in the partnership/shareholder agreement the formula for determining the value of the firm, to which the new partner’s/shareholder’s percentage interest can be applied. This could include non cash-based assets such as accounts receivable, unbilled work in process, and goodwill. Another approach is to base the buy-in or capital contribution upon a the cash-based capital based upon the number of ownership shares a partner receives. Most firms allow for a buy-in over several years. Firms that do have a buy-in provision also typically provide for a payment to partners/shareholders upon departure for the value of their capital account. In recent years, an increasing number of large firms have adopted a free buy-in. Under that approach, there are no payments to departing partners/shareholders.

I believe that you should require at least a capital buy-in based upon the cash-based capital on the books and the number of ownership offered. This assumes that the partners still have capital accounts on the books. I also think you might consider them buying into the accounts receivable and unbilled work in process as well or be excluded from participating in compensation from those receipts. You should also get a partnership agreement in place as well.

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John W. Olmstead, MBA, Ph.D, CMC

 

Apr 25, 2017

When Should a Law Firm Partner Compensation System Be Changed?

Question: 

I am a partner in a fourteen attorney business litigation law firm in New Orleans. There are five partners in the firm. We are a first generation firm and all of the five partners are the original founders. Each of the partners have equal ownership interests and are compensated based upon ownership points. While this approach to compensation worked for many years this system is no longer working for us. Performance used to be pretty close but this is no longer the case. Your suggestions are welcomed.

Response: 

This is a common problem that new law firms eventually face. Here are a few thoughts:

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John W. Olmstead, MBA, Ph.D, CMC

Aug 09, 2016

Law Firm Financial Management – What Reports Should I Give To the Attorneys in My Firm

Question:

I am the firm administrator of a sixteen attorney firm in San Diego, California. We have six equity members, four non-equity members, and six associates. We also have four paralegals and six staff members. We are managed by a three member executive committee. Each month I provide the equity members and the executive committee with the same reports from our software system. They are quite numerous. The equity members and the executive committee complain that they get too many reports and they don't look at them while the non-equity members and the associate complain that they don't get access to any financial information. Do you have any suggestions?

Response:

Less is often more. I would rather see partners receive less reports and read and use the reports they do receive. They can always request additional detail reports if they desire them. Think of a pyramid – at the top are equity members, then non-equity members, associates and then the executive committee and the firm administrator. At the top of the pyramid the information is more summarized and more detail is provided as you work you way down the pyramid. For example, do the equity members need to see journal registers, cash receipts registers, etc.?

I suggest you develop a report distribution guide that outlines who gets what and when and have it approved by the executive committee. Here is an example:

The objective of these guidelines are to provide timely, meaningful reports to firm management, equity and non-equity members, associates, and other timekeepers. Therefore, as few reports as possible should be distributed to reduce bulk and information overload. All other reports not listed for equity member distribution should be available to them on a per request basis.

Daily Reports

 Weekly Reports

 A detailed time report will be generated weekly (by Wednesday of each week for the conclusion of the preceding week) and will be distributed as follows:

Monthly Reports

        Monthly reports should be distributed no later than the 5th of each month according to the         following schedule:

        Equity Members             

        Non-Equity Members

        Executive Committee

        Director of Administration

        Associates

        Paralegals

        Staff (Timekeepers Only)

Quarterly Reports

Annual Reports

Annual reports are generated at the end of the year and maintained in a end of year section of the reports binder for the year (or computer system)

        Equity Members

        Same reports as received monthly.

        Managing Member/Executive Committee

         Same reports as received monthly

        Director of Administration

        Same reports as received monthly

        Note: At year end each of the above reports should be printed and saved to a file to the         reports folder that has been setup on the computer network. This should be done prior to         running the year end close.

        Associates

        Same report as received monthly.

        Paralegals

        Same reports as received monthly.

        Staff (Timekeepers Only)

        Same reports as received monthly.

Click here for our financial management topic blog

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John W. Olmstead, MBA, Ph.D, CMC

 

Aug 02, 2016

Law Firm Acquisition Due Diligence – What Should I Ask For

Question:

I am the managing partner of a five lawyer firm in Denton, Texas. We have the opportunity of acquiring a sole owner practice in a nearby city with a complimentary practice area. We have had one meeting and our firm is interested. We want to initially do a quick and dirty due diligence so see whether this firm is really a qualified opportunity. What sort of information should we ask for?

Response:

I would initially ask for the following:

  1. Five years profit and loss statements and balance sheets and tax returns. (2011, 2012, 2013, 2014, 2015)
  2. Lawyer and staff headcount for each of those five years.
  3. Current hourly billing rates.
  4. Description of his mix of clients by dollars and by time expended – practice type and geography.
  5. Description of how the firm bills (hourly, flat rate, contingency)
  6. Copy of leases (space and equipment)
  7. Copy of malpractice insurance policy and last application.
  8. Salaries and benefits for attorneys and staff members.
This will give you a good idea of what you are dealing with and whether the opportunity is worth pursuing further. If you decide you want to pursue this opportunity you can ask for additional information as the discussions unfold.
 
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Jul 26, 2016

Law Firm Marketing – How Much Should We Be Spending on Marketing?

Question:

I am the managing partner of a 12 attorney firm in Providence, Rhode Island. In our recent partner meetings we have been discussing ramping up marketing. How much should we be spending on marketing?

Response:

Studies that have been conducted indicate that law firms that provide services to business firms (B2B) spend approximately 2.4% of fee revenue on marketing. However, law firms that focus on individual consumers (retail law if you will) spend much more – 10%+ of fee revenues on marketing – especially if strong referral networks are not in place. I have several PI, SSDI, Elder Law and Estate Planning firm clients that are spending 10%+ of their fee revenue or greater on marketing. I have some extremely successful PI firm clients spending 20% of their revenue on marketing. 

The amount of appropriate investment can depend upon referral networks in place. I have successful PI and Estate Planning firms that are spending very little on marketing, are getting all of their business from their referral networks, and spending next to nothing on marketing and advertising. (By referrals I am speaking about professional referrals not involving a referral fee and client referrals. If referral fees are involved they should be considered a marketing cost) So it depends upon your situation, the type of cases you are going after, etc.

Be careful of spending to be spending. Marketing expense scan be a deep hold that yields no return on investment. Insure that your marketing investments are targeted, well thought out, measured, and are working. Determine up from whether your goal is long term brand building or short term lead generation going in.

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John W. Olmstead, MBA, Ph.D, CMC

 

Feb 09, 2016

Law Firm Marketing Director – Are We Ready For One – What Should we Look For?

Question:

We are a 25 lawyer insurance defense firm in Northwest Dallas. We are managed by a managing partner, firm administrator, and director of human resources. We have been discussing the need for a marketing director. Are we too small? If we decide to hire one what should we be looking for and where should we start our search?

Response:

There is no magic size. I have seen five lawyer firms effectively use a marketing director and thirty lawyer firms that do not have one. It all comes down to your firm's specific need, what you are wanting to accomplish, and what the lawyers are willing to let a marketing director do.

While the popular title is marketing director, director of client and business development, etc. some marketing staff in smaller firms often function more as marketing coordinators and event planners. If you are looking for someone to help the firm devise a competitive strategy, lead the firm's strategic planning effort, help diversify the practice, etc., you need to look for an experienced marketing director with five plus year's experience in law or other professional service firm marketing at a director level.

If you need someone to update the website, write bios, write blogs, update social media, create brochures, and plan and coordinate events – you may only need a marketing manager or coordinator with excellent writing skills. Prior experience in law or professional service firm marketing is a plus but not required. Journalism and mass communications are popular degrees for this position.

The Legal Marketing Association (LMA) is an excellent source for finding candidates. Here is a link to the LMA job bank

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John W. Olmstead, MBA, Ph.D, CMC

 

 

Feb 02, 2016

Law Firm Succession – Should I Close My Doors

Question:

I am a lawyer from Carbondale, Illinois area. Last week I attended you Illinois State Bar Association CLE Webinar – Law Practice Succession and Transition – Ideas for Getting Started. I am 66 years old and I fit the "Sole Owner" model that you discussed. I am the practice. I have one associate and one legal assistant and my associate has neither the desire or the ability to take over my practice. I am tired and want to retire by the end of the year. With no successors in site I am thinking that I should just close the doors at the end of the year. I welcome your thoughts.

Response:

It could come to that if you cannot find someone interested in taking over your practice. However, since you have almost a year before your planned retirement I would at least try to see if you can find another lawyer or law firm to buy or otherwise takeover your practice – preferable "buy". Start now as it often takes a year. Make a short list, make some phone calls, have some lunches, get to know some folks, and see what kind of interest there might me. Keep a continual momentum going. Since you are the practice – this will be a concern to a potential buyer especially if you are unwilling to stay on after the sale in a consultative transition capacity. You might want to rethink your timeline – otherwise you may have to simply close the doors and refer out the work and strike the best arrangement that you can.

Click here for a link to my book – The Lawyers Guide to Succession Planning – published this week by ABA

Click here for our blog on succession

Click here for out articles on various management topics

John W. Olmstead, MBA, Ph.D, CMC

 

Nov 17, 2015

Law Firm Fee Increases – Should We Increase Our Fees?

Question:

I am the partner in charge of finance at our 12 attorney litigation boutique firm located in downtown Chicago. For the past two years our profits have been down and we are considering raising our rates but we are concerned that we may lose some of our corporate clients. We welcome your thoughts.

Response:

Raising fees is one approach you might consider. Clients are starting to push back more and more concerning legal fees. If you are at the high end of the rate scale I suggest that before charging off and raising rates you step back and conduct a process review by using an approach similar to the following:

  1. Pull a random representative list (by timekeeper and type of matter) of matters that have been concluded during the past six months. Say 10-20 matters.
  2. Calculate the effective hourly rates for each matter overall as well as by timekeeper class. (partner, associate, paralegal)
  3. Compare the calculated effective rate to your internal standard time billing rates as well as to external benchmarks. (Other firms from published survey data) How do they compare? What did it cost to staff the matter?
  4. Review the time detail for each of these matters and ask questions. You might want to flow chart and document the work flow. Is the firm working smart? Is time being dumped on these flat rate matters so that a timekeeper's hours look good on the production reports?  Is the firm using the right mix of paralegals and attorneys to staff the work? Is there wasted or duplicative effort? Is technology being used? Can work steps be eliminated or reduced? Should the firm consider a "limited representation" unbundled option?
  5. Pilot test a few new approaches and measure the impact upon profitability.

Keep in mind that raising fees is one way of improving profitability. There are other ways as well. In today's competitive environment. Working smarter, efficiently, and more effective is another.

Click here for our blog on competitive business models

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John W. Olmstead, MBA, Ph.D., CMC

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